Bad news for Big Tech

Much has been written about whether Big Tech has peaked. Meta recently announced its first revenue decline amid a decline in online advertising. Amazon, Netflix and others have cut the hiring. Many platforms have seen share prices plummet this year, typical of rising interest rates, and their growth is slowing.

However, these are short-term trends that depend on the global business cycle. The bigger shift is that real cracks are showing in Big Tech’s core business model, which depends on globalization and the network effect to create scale. Three important political and regulatory shifts challenge the platforms’ ability to push boundaries and capture market share. And they’re doing it in ways that will prove more durable and have more impact than the ebb and flow of stock prices in a global recession.

First, let’s look at the EU rules passed in July that will force the world’s largest instant messaging services – including Apple’s iMessage, Meta’s WhatsApp and Facebook Messenger, and very likely Google Chat and Microsoft Teams – to communicate with each other. This kind of “interoperability” will make it difficult for such companies to capture market share beyond the usual Big Tech Land grabbing, in which users are lured to a specific service and then trapped by making it difficult for their data and information to be transferred to competitors.

When contact lists and other data are instantly portable, it becomes easy to switch from one service to another. This may lead to a more competitive technology landscape over time, although privacy advocates worry that this will also create greater potential for data breaches, as it will require a more open software paradigm that some believe could undermine security).

On the political front, the opposite is happening – crossing borders is becoming increasingly difficult for many tech companies. Two weeks ago, Alibaba, the Chinese tech platform giant, applied in advance for an initial listing on the Hong Kong Stock Exchange new US financial rules that require more scrutiny of sensitive data than Beijing wants to allow. About 200 Chinese companies could be delisted due to US regulation. This underscores the bipolar or even tripolar world that is developing in technology, with the US, Europe and China diverging.

While there is talk of the Biden administration lifting tariffs on China, America’s business and political elite have little expectation that we will return to a single, unified global grid. The Council on Foreign Relations recently published a task force report entitled “Confronting Reality in Cyberspace: Foreign Policy for a Fragmented Internet”. It declared that “the era of the global internet is over” and “Washington cannot stop or reverse the trend towards fragmentation”.

The task force, which included technologists, business leaders, public sector officials and intelligence providers, urged politicians to build digital commerce between “trusted partners” (which sounds similar to “friend shoring’), to resolve US-EU data transfer issues and to use the European General Data Protection Regulation (GDPR) as the basis of a common privacy policy for liberal democracies.

There’s work to be done on this front — the US can’t even pass a federal privacy law. This is partly due to fears on the political left that the tech industry has managed to water down the national bill to the point that it would actually undermine the strict rules already in place in states like California. There are also concerns that a federal law would place too much of a burden on one agency, the Federal Trade Commission, to enforce it.

But the FTC, under its landmark Antitrust Chair Lina Khan, is already pursuing a potentially landmark case in another area. In late July, it questioned Meta’s bid for virtual reality company Within, arguing that the company was already a major player in VR and was trying to “buy its way to the top” rather than compete on its own.

The case, which is highly unusual in that it is a small start-up acquisition rather than a merger between two giants, gets to the heart of Big Tech’s model of nabbing potential competitors in their infancy. For example, Facebook’s acquisition of Occulus, a burgeoning VR company, ahead of Meta 2014 ensured that the upstart’s promising OS didn’t compete with its own. The acquisitions of Instagram and WhatsApp also prevented these companies from becoming competitors for social networks.

Meta is hardly alone here. Numerous startups have accused Amazon of acquiring their technology to launch competing products. And Google has picked up hundreds of potential competitors. But if the current case, which will drag on for years, is successful, it would fundamentally change big tech’s tactic of smothering fledgling competitors.

All of this, in turn, would undermine the network effect that has allowed the largest companies to reach such scale and concentration. It might even open the door for platform breakup. The process will take time and will be done in different ways depending on the region. But these challenges to the big tech business model are real. Investors should take this into account. Bad news for Big Tech

Adam Bradshaw

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